Weekly Market Outlook (18-22 December)

UPCOMING EVENTS:

• Monday: US NAHB Housing Market Index.
• Tuesday: RBA Meeting Minutes, BoJ Policy Decision, Canada
  CPI, US Building Permits and Housing Starts.
• Wednesday: PBoC LPR, UK CPI, US Consumer Confidence, BoC
  Summary of Deliberations.
• Thursday: Canada Retail Sales, US Q3 GDP Final, US Jobless
  Claims.
• Friday: Japan CPI, UK Retail Sales, Canada GDP, US PCE,
  University of Michigan Consumer Sentiment Final.

Tuesday

The BoJ is expected to keep everything
unchanged with rates at -0.10% and YCC to target the 10yr JGBs at 0% with 1% as
a reference cap. The latest Japanese
CPI showed a slight easing in inflation rates
although they remain well above the 2% target. The central bank is mainly
focused on wage growth as it doesn’t foresee sustainable price increases.

The wages
data picked up recently and the BoJ might
want to wait for some more months before considering a tweak in its monetary
policy. The latest big development was a speech
a couple of weeks ago by BoJ Governor Ueda where, if you read between the
lines, he hinted to an end to the NIRP in 2024 and triggered a huge rally
in the Japanese Yen.

The Canadian CPI Y/Y is expected at 2.9%
vs. 3.1% prior,
while the M/M figure is seen at -0.2% vs. 0.1% prior. The BoC is focused on
the underlying inflation measures (common, median and trimmed-mean), so
those will be the figures to pay attention to. BoC
Governor Macklem last Friday said that
the 2% inflation target is now in sight, which reaffirmed the central bank’s
neutral approach. The major central banks have ended their tightening cycles,
so the market is now pricing in rate cuts in 2024. Strong data might just
trim the amount of rate cuts expected but not erase them.

Wednesday

The PBoC is expected to keep the LPR rates
unchanged at 3.45% for the 1 year and 4.20% for the 5 years. Such expectations
come from the PBoC leaving the MLF
rate unchanged recently which generally
acts as a precursor to a change in the LPR rates. Chinese officials have
been promising forceful and precise actions to spur growth although we haven’t
seen much of that with the deflationary
forces continuing to weigh on the economy.

The UK CPI Y/Y is expected at 4.4% vs.
4.6% prior,
while the M/M figure is seen at 0.2% vs. 0.0% prior. The Core CPI Y/Y is
expected at 5.5% vs. 5.7% prior, while the M/M reading is seen at 0.2% vs. 0.3%
prior. Last week, the BoE
kept interest rates unchanged
and maintained its neutral stance in stark divergence with the surprisingly
dovish FOMC decision. Again, the market’s reaction function is now “strong
data equals less rate cuts while weak data equals more rate cuts”.

The US Consumer Confidence has been
falling steadily in the past few months as the labour market started to weaken.
In fact, compared to the University of Michigan Consumer Sentiment, which shows
more how the consumers see their personal finances, the Consumer Confidence
shows how the consumers see the labour market.
The consensus sees the index rising to 104.3 in December vs. 102.0 in November.

Thursday

The US Jobless Claims continue to be one
of the most important releases every week as it’s a more timely indicator on
the state of the labour market. Initial Claims keep on hovering around cycle
lows, which shows us that layoffs have not yet picked up notably, but
Continuing Claims have been rising and that’s indicative of people finding it
harder to get another job after being laid off. This week the consensus
sees Initial Claims at 218K vs. 202K prior,
while there’s no estimate at the time of writing for Continuing Claims,
although the last week’s number was 1876K vs. 1856K prior.

Friday

The Japanese Core CPI Y/Y is expected at
2.5% vs. 2.9% prior,
while there’s no consensus on the other measures at the time of writing
although the Headline CPI Y/Y was 3.3% in October and the Core-Core CPI Y/Y was
4.0%. This inflation report comes on the last day before Christmas holidays and
after the BoJ Policy Decision, so the market’s reaction is likely to be
muted unless we get big surprises.

The US PCE Y/Y is expected at 2.8% vs.
3.0% prior,
while the M/M figure is seen at 0.0% vs. 0.0% prior. The Core PCE Y/Y, which is
the Fed’s preferred inflation measures, is expected at 3.4% vs. 3.5% prior,
while the M/M reading is seen at 0.2% vs. 0.2% prior. Unless we get big
surprises, it’s unlikely to see the market react to this report given that we
already saw the more timely CPI data. If the Core PCE M/M prints at 0.2%,
the 6-month annualised rate would fall to 2.4%, which is basically at the Fed’s 2%
target.